The DOW and Russell 2000 indices had an early bump higher in February to begin the month. Gains were promptly given up before the first week’s trading was finished. The S&P 500 traded meekly out of the chute before heading lower. The NASDAQ retreated right away to start February and continued on that trend.
Trading volatility continued throughout February and into March. Equity winners were heavily sold. Technology companies, and specifically software names, have been beaten down due to the AI rhetoric. Financials pulled back from recent highs with concern over the number of rate cuts, possible stagflation/recession and private credit worries.
Energy was moving higher after Venezuela’s “Operation Absolute Resolve,” and with the buildup to the Iran conflict. “Operation Epic Fury” exacerbated the move at the end of February, catapulting oil prices today over $100.00 per barrel, not seen since March-July 2022.
S&P 500: Feb -0.87% YTD +0.49%
DOW: Feb +0.17% YTD +1.90%
NASDAQ: Feb -3.38% YTD -2.47%
Russell 2000: Feb +0.53% YTD +5.87%
Sector Performance YTD thru February:
Communication Services +0.26%
Consumer Discretionary -3.82%
Consumer Staples +15.98%
Energy +24.41%
Financials -6.34%
Healthcare +3.23%
Industrials +14.05%
Technology -5.60%
Materials +17.63%
Real Estate +9.14%
Utilities +11.32%
Current U.S. Treasury Yields:
6 Month Bill 3.61%
2 Year Note 3.53%
5 Year Note 3.69%
10 Year Note 4.11%
30 Year Note 4.74%
The Economy and the Fed:
Fed officials meet mid-March, and the expectation is that the FOMC will hold rates steady, 3.5%–3.75%. This will make two meetings in a row with no rate cut. Moving forward, the strategy is not clear. Fed governors are divided; to cut the lending rate or keep rates higher for longer. As well, raising rates was cited should inflation run hotter than expected.
Trump’s Fed Chair nominee, Kevin Warsh, still needs to be confirmed by the Senate. Chair Powell’s tenure ends in May. Powell has not stated if he will remain as a governor at the end of his term.
A hotter PPI and unemployment numbers further complicate the picture. Neither is catastrophic and somewhat seasonal. The AI topic is fraught with inaccuracies. It will not be the job nor the economic growth killer it is purported to be. Short-term digestion is normal and creates uncertainty and worry. In the long run, productivity will increase, expanding output, and fueling demand growth. Ultimately, wages will rise.
Looking Ahead:
The long sought-after market rotation is well under way. Equities are reflecting this shift. AI has the market recalibrating trading multiples on beloved Technology names. Small and mid-cap growth equities have captured investment dollars, and value names/sectors are participating. This is great for the market and investors. Q4 earnings were generally excellent.
Geographically, institutional investors have pursued emerging markets, Japan and European equities. They have performed better than the U.S. market YTD. These areas have been avoided for quite some time. This is an indication that global markets have become healthy and investable.
The U.S. offensive in Iran has created market uncertainty and elevated oil prices. As oil goes, so goes the markets. We believe the conflict will not be long lived. When the Iran war is resolved, the markets will respond to the upside swiftly.
In February, GN&Co celebrated our 50th anniversary! We have been investing on behalf of our clients for a long time. There aren’t many market variables we haven’t weathered. We continue to monitor our holdings. We will act accordingly to first protect principal, and secondly, to take advantage of pricing disconnects. We remain steadfast that markets will settle down and track positively for the year.